Why Wall Street’s Finally Pushing to Add Women on Boards

After years of fits and starts, mutual-fund giants including BlackRock Inc., Vanguard Group Inc. and State Street Corp. are embracing shareholder proposals to add more women and minorities as directors. This may signal a tipping point for the decades-long struggle for greater representation.

The shift heartens long-time activists such as Joe Keefe, chief executive officer of mutual-fund firm Pax World Management, which filed its first diversity proposal in 2012. “It can have an enormous impact,” he said. “We will get gender parity on boards at a much quicker pace.”

The moves reflect both a change in thinking and a cool business calculus. Yes, many experts agree, broader representation tends to improve corporate performance. It also happens to resonate with young people, a crucial target market for the investment industry.

Whatever the catalyst, major fund companies — including those that tout their diversity bona fides — see reason for optimism in the years ahead, despite the often-slow progress within their own ranks and recent scandals in Hollywood and beyond.

“Five years ago, people thought we were mildly eccentric and tree huggers,” said Saker Nusseibeh, CEO of London-based Hermes Investment Management, a long-time supporter of diversity. “It’s started to shift now.”

That point was driven home recently when BlackRock and Vanguard, twin giants of stock index funds, backed a shareholder proposal at Hudson Pacific Properties Inc., siding against management on a measure to add women and minorities to its all-male board. Three months later, the California property company named Andrea Wong, a woman of color and former Sony executive, as a director. (Hudson Pacific said it was already committed to diversity.)

This year marked the first time the three giant investors wielded their considerable voting clout in favor such proposals.

“In some cases, you get the feeling that nothing is going to change unless you vote against management,” said Michelle Edkins, global head of BlackRock’s investment-stewardship team, with about 30 members.

The pressure may increase in 2019, when proxy-voting service Glass Lewis plans to recommend that its 1,200-plus investor clients — who manage more than $35 trillion in assets — reject nominations for committee chairs at companies with all-male boards.

The motivation isn’t entirely altruistic. Morgan Stanley research shows that 86 percent of millennials, who represent more than 75 million potential clients, are interested in environmental, social and governance — or ESG — investing, which surged by a third in the U.S. during the two years ending Dec. 31, 2015, to $8.7 trillion, according to data from US SIF: The Forum for Sustainable and Responsible Investment. Within this group, assets that consider diversity grew 22 percent to $707 billion.

Diversity also makes money. Studies increasingly show a critical mass of female directors improves return on equity, profits and decision making. Even so, five S&P 500 companies and at least 700 in the Russell 3000 still have all-male boards. Canada and Europe, where many nations have quotas, surpassed the U.S. in 2014.

Read more: Women and Minorities Are the Majority of New Board Seats for the First Time

Shareholders filed 35 diversity proposals at American companies this year, five times as many as in 2011, according to ISS Corporate Solutions’ Voting Analytics database. Only eight went to a vote; most were withdrawn when the company agreed to engage privately with investors.

The big three didn’t vote in favor of all eight, according to data from Fund Votes. They also didn’t back a dozen proposals seeking equal pay for women. The firms say they want diversity but don’t always support the resolutions, especially if they’re speaking with management and see progress.

BlackRock did oppose management’s proposed directors at five of the companies. The world’s largest money manager, with almost $6 trillion under management, has four women on its own board, or 24 percent, slightly above the U.S. average. Twenty-six percent of its senior leaders are women. Chairman and CEO Laurence D. Fink has said he wants gender parity.

“More than 50 percent of household wealth is managed by women,” Fink said at the Bloomberg Global Business Forum in September. “If I’m going to be a mirror of my clients, we are going to need more women.”

Diversity is also a priority at Vanguard, which manages $3.4 trillion of equities and owns significant stakes in some companies, including 16 percent of Hudson Pacific.

“We expect boards to focus on it as well, and their demonstration of meaningful progress over time will inform our engagement voting,” CEO F. William McNabb III wrote in an Aug. 31 letter to companies worldwide.

These public voices matter even more now. Republican legislators and members of business lobbying groups are seeking to raise the bar for filing proposals to 1 percent of a company’s outstanding capital from just $2,000 now. This would eliminate Pax and other small activist investors.

Even a majority vote doesn’t guarantee change, though. Six months after 63 percent of shareholders at Cognex Corp. supported a diversity measure, the Massachusetts-based maker of machine-vision equipment still hasn’t added any women to its nine-man board. Cognex didn’t respond to requests for comment.

Putting a stake in the ground also can expose an investor to scrutiny. State Street, which earned worldwide publicity for its “Fearless Girl” statue, settled a discrimination case in October with more than 300 female executives who said they were paid less than male counterparts. The $5 million payout is small change for a manager of $1.6 trillion in equities, but it was an embarrassing black eye for the firm, which has three women on its 10-person board.

State Street said it chose to settle even though it disagreed with the results of the pay investigation, citing differences in job function and responsibilities.

“It’s more important to focus our resources on initiatives that drive systematic and sustainable change,’’ the Boston-based fund-manager said in a statement.

State Street voted against nominating-committee members at 400 companies. Seven companies it engaged with directly added at least one woman to their boards — State Street’s goal for now.